Financial Head Loppings

This week, the Mogambo dresses up as his like-minded counterpart – the Red Queen from Alice in Wonderland – and screams with every bit as much disdain as she, "Off with their heads!" Of course, his cries for decapitation are directed at the lying heads of the Congressional Budget Office.

Now that aggregate government spending is approximately half of all spending in the country, the major point of all the recent losses is the effect that Florida, like many states, is discovering to its horror that tax revenues are falling as the economy spirals down and down.

The governments are reacting as you would expect, initiating all kinds of tiny spending cuts, massive stealth tax hikes, freezing of new hiring, new borrowings (which has now reached 7% of annual tax revenue in Florida), and the raiding of trust funds to "plug" budget gaps, which only get worse and worse now that the predictable economic catastrophe of boom-turning-to-bust has, at long last, started.

The St. Petersburg Times reports that Amy Baker, the chief economist for Florida’s government, has discovered "a projected $3.5 billion hole in the state’s budget" and has now "sounded a series of alarm bells" that have "added a new term to Florida’s fiscal lexicon: a ‘structural imbalance’, the gap between the growth in the state’s revenues and its larger ongoing expenses", which is, of course, wonderful news for those of us who desperately yearn for yet another term that means "A government spending more than it receives in the quest to give everyone a perpetual free lunch."

But you will be glad to know that Florida, like many states, is determined not to let that happen, as the whole problem is immediately rendered insignificant when, as Ms. Baker is later quoted as saying, "The budget’s going to grow, independent of any revenue constraints."

At this, I laughed in a tentative, nervous way – "Hahaha" – at the prospect of Ms. Baker finding a way to let the state’s budget grow forever, regardless of how much money comes in. Again, her words echoed in my brain; "The budget’s going to grow, independent of any revenue constraints." I feel a cold chill.

Desperate for comic relief, I turn to the September 10 article in the Wall Street Journal titled "Budget Deficit Likely Doubled for Fiscal ’08", mostly because I thought we WERE in fiscal 2008 already! Anyway, the new fiscal year begins on October 1, less than a month away, and the Congressional Budget Office’s new calculation of the "budget deficit" is a terrible, and yet a laughable, $407 billion.

Another reason that I am amused by the Journal article is that with all the talk of a budget deficit, and previous budget deficits, and how calculating it is such a difficulty, blah blah blah…not once does the article mention the size of the damned budget that produced the deficit! Not once! Therefore, I laugh "Hahaha!" to indicate comic bemusement tinged with horror.

I assume, as I always assume since I am such a paranoid, suspicious and very creepy little weirdo that correctly sees government as "goons with badges and guns who are all out to get me", that the Journal is a co-conspirator with the government in down-playing anything that might upset anyone, such as revealing the gut-wrenching fact that the federal budget is now more than a staggering $3 trillion dollars, which is a hefty $10,000 for every man, woman and child in the country, and it’s equivalent to $30,000 being spent by everybody who has a non-government job!

Later on, we learn that the 2007 budget deficit is reported as being $161 billion, which makes me laugh again in derision and scorn, "Hahaha!" as my initial reaction, of course, was to loudly heap scorn and ridicule on the Congressional Budget Office, because I happen to know that the national debt is $9,669.9 billion, whereas last year at this time it was $9,006.0, meaning that in the last 12 months, the national debt increased $663 billion.

So, for the Congressional Budget Office to bring up the totally irrelevant 2007 fiscal budget deficit of $161 billion makes me yell, "Off with his head! Off with his head!" with every bit of imperious Red Queen arrogance I can muster.

But the point is not that I look ridiculous dressed up as the Red Queen from Alice in Wonderland, or that everybody is lying their heads off about the government’s spending deficits and ignoring the government’s intellectual deficits, but that all of this deficit spending means that more money has to be created, which will create more inflation in prices, which means more money must be created, which means more inflation in prices, around and around, which is why everyone should be buying gold and silver, but nobody is, making themselves look ridiculous, and then they turn around and say that I look ridiculous in my wig and crown!

Ha! I say, "Off with their heads, severed with a golden sword!", which is so deliciously ironic that they should plotz from it, and even if they don’t, I can get my revenge by getting stinking rich by buying gold and silver at these lows, courtesy of them not driving the prices up by buying them, too.

I hope revenge is as sweet as they say it is! Whee!

Until next time,

The Mogambo Gurufor The Daily Reckoning
September 22, 2008

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

Life imitates farce, dear reader.

Occasionally, we offer a hyperbolic view – on the nature of man, his markets, or his government. Then, what do you know…some fool goes and makes a prophet of us!

Long ago, we wrote that "Americans would gladly give up their liberties to anyone who could guarantee a rising housing market," or words to that effect.

And here we have the latest news…

Liberation, the French socialist newspaper, has a smug cartoon showing George Bush begging on the street: "Can you spare a trillion?" asks the American president.

Yes, the cost of the bailout is advertised at $700 billion. But it could reach much higher. We see the trillion-dollar figure in several places; it seems to have originated with Harvard economist Ken Rogoff, who figured the cost at about twice as much as the Resolution Trust Company. The RTC cost the nation 3% of GDP as it took over crumbling S&Ls in the ’90s. This debacle is much more serious, he guesses; it will cost at least twice in GDP terms…say, 7%…or about $1 trillion in round numbers.

Where do the feds get that kind of ready cash? Ah…they sell their souls…liquidate their rights…and wrap chains of debt around every American’s neck. The U.S. government deficit is already $490 billion. With the cost of the slump…and the bailout…it is expected to top $1 trillion…or more.

Not since the ’30s has the United States seen such sweeping reorganization of its economic institutions. Not since Roosevelt…and the New Deal.

But wait, the United States was supposed to be a leader in freedom. We were so adamant about it we practically forced it upon the poor Arabs and Afghanis… But now that people are losing their houses and Wall Street bonuses are in jeopardy…freedom is the last thing we need.

Ban short selling! Nationalize the mortgage lenders! Nationalize the insurers! Take on the bad debts and bail out the bad investments of the whole financial industry! Spend a billion. Fifty billion. A thousand billion!

"How fabulous," writes Brian Reade in the British tabloid The Mirror. "Thanks to the way it props up the USA’s two biggest mortgage firms, more than half of American homes are now effectively owned by the state… Who’d have imagined that when the most right-wing of neo-cons leaves office 50% of the Land of the Free will effectively be [public housing]"?

Yes, almost every imbecilic act we could imagine has become fact. No exaggeration is too extreme. Life imitates farce.

A few years ago, in a moment of lighthearted hyperbole…we suggested that the War on Terror was such an absurdity… "Why not a War on Bear Markets?" we wrote.

And now, we have one!

Yes, the Prime Minister of England, Gordon Brown, compared the U.S.-led, global fight against falling asset prices to the "war against terrorism."

And yes, it is similar in many respects. It will cost about the same amount – over $1 trillion. And it will produce the same general results: less freedom for everyone.

Already, the dems and reps are warming up for a major battle against free markets.

Both parties seem to think that it would be shameful for prices of debt and equity to fall to what they are really worth – that is, to what willing buyers would pay for them. Over the weekend, the pols joined hands in trying to prevent it. The $700 billion program allows the feds to buy almost any piece of junk that investors don’t want. It says so right here in the Financial Times. The feds can buy "residential and commercial mortgage-backed securities, with discretion for the Treasury Secretary and Fed chairman to add others as needed."

We’d put that last phrase in italics, if we knew how to do so. Because it leaves the door of the fed’s EZ lending bank open to anything…24-hours a day.

The Treasury has a "blank check…to buy troubled assets," says the FT.

"This was very necessary," said Hank Paulson. Then, slipping from farce into Dada or the theatre of the absurd: "We did this to protect the taxpayer," (showing no confidence that American taxpayers can actually protect themselves.)

While writing a blank check, the politicians also limbered up for their election campaigns…each trying to come up with catchy new slogans and new ways to punish Wall Street publicly, (while actually trying to let them off the hook for billions of dollars worth of bad investments).

"Greed," said Obama, was the source of the problem. "Greed," said McCain, was the real problem. Cap Wall Street salaries! Reregulate!

This was "not time for ideological purity," suggested John Boehner, the Republican House majority leader, calling for unity. No, this was time for pandering…posturing…and promises.

And so, principles were out the window. "I’m a free-market non-interventionist," Boehner continued, "But we face a crisis, and if we don’t act, and quickly, we’re going to jeopardize our economy."

Principles are fine, in other words, until they get in the way of house prices!

*** Roosevelt is back. But which Roosevelt? Obama is positioning himself as the Franklin version: ranting against free markets and Wall Street.

McCain prefers Teddy – an interventionist too, but one who preferred meddling in the affairs of foreign nations to meddling in the domestic economy.

Which was worse? Teddy, with his bullying guns? Or Franklin with his greasy butter?

Hard to say which did more damage. The first set the United States on its imperial course… He was so worried that the vacillating Woodrow might not get the United States into WWI before it was over, he threatened to raise his own army and intervene on his own. The U.S. has bumbled into practically every important fight on the planet ever since.

Franklin, meanwhile, set up Fannie and Freddie to help solve the nation’s housing needs. He set up dozens of other agencies, subsidizers and regulators. Taking Bismarck’s example for his model, he turned the United States from a basically free-market economy…to a "mixed economy" – with heavy government influence and control.

And now, we suffer both Roosevelts…both pay for both guns and butter. We bear the burdens of constant inflation and eternal war, in other words; and both will remain with us no matter which Roosevelt wins in November.

*** Niall Ferguson writes in today’s Financial Times. We like Ferguson. He usually comes to see the world the way we do; he is just a little slow:

"On one side can be seen the chain reaction of deleveragings as banks, other companies and households all battle to stabilize balance sheets that became much too highly geared in the days of easy money; as the resulting credit contraction and forced asset sales create a vicious downward spiral; as the slowdown spreads to Main Street and from Main Street to the world.

"On the other side are the Fed and the Treasury, desperately manning the monetary and fiscal pumps while trying to decide who is too big to fail and who is not."

So, the war is on! The war on bear markets! The war against deflation! The war against good sense…

*** A friend in Buenos Aires sends this analysis…

"Latin America has suddenly become very interesting. There are intersecting issues – domestic and geopolitical. There is a general way to state this. In times of crisis between great powers, local issues get energized by the international conflict. The changes in Russian-American relations reverberate in corners of the world that have been neglected since the Cold War. There are a lot of shifts taking place everywhere, and we have mentioned them all in previous Guidances. Let’s focus on Latin America this week. That is not a place that has been really exciting geopolitically in the past, but it is getting there now.

"1. Bolivia nearing the boiling point: Bolivia is in a near civil war, with regional powers – particularly Brazil – looking on uneasily. The United States is confronting Evo Morales, the radical president of Bolivia. It is a very traditional confrontation, with a Latin American radical challenging the United States. New powers like Brazil are in the mix, and Russia could use the crisis to give the United States other headaches. We need to watch both internal and global implications.

"2. Venezuela and Russia: The Venezuelans and the Russians are getting close. The military implications are trivial at this point, but having a potential patron energizes Venezuela in new ways and gives it confidence. We need to watch the effect on foreign companies in Venezuela and long-term collaboration.

"3. Colombian guerrillas: The Revolutionary Armed Forces of Colombia (FARC) had ties to Cuba and the Soviets in the old days. Those FARC leaders who are still alive and not in nursing homes still have active contacts. The Russians could really jerk the American chain in Colombia – and depending on how the United States acts in the former Soviet Union, the Russians will do just that. We need to watch the FARC now and see if it reaches out to the Russians.

"4. Nicaragua: Nicaragua – dormant since the 1980s – has its old President Daniel Ortega and its old rhetoric back, and it is backing Russia in Georgia to the hilt. We need to watch Nicaragua and the rest of Central America, especially El Salvador, to see if this is going anywhere.

"5. Mexico’s cartels: The cartels in Mexico are fighting the government and each other. If Ukraine is invited into NATO, the Russians would love to give payback in Mexico. The Russians used to have close ties to the Mexican left, and Russian organized criminal groups are currently involved in criminal activities such as prostitution and human smuggling in Mexico. And certainly, through the Cubans, the Russians know their way around Latin American drug traffickers.

"Instability in Mexico would be an interesting strategy for Russia – not that Mexico needs much help there. But the smuggling routes could carry all sorts of goodies into the United States.

"6. Cuba: Cuba remains the mystery. Havana is oddly quiet. Are there discussions going on with the United States? There should be, as far as the United States is concerned, but with an election coming, such talks are hard to set up. The Cubans don’t seem to want to play the Nicaraguan game. One scenario is that after the election, the Bush administration could move to normalize relations with Cuba and take the heat. The administration’s ratings will not matter and cannot go any lower. There is no evidence this will happen; it is just a theory.

"7. Russia’s behavior in Latin America: In general we need to see whether the Russians start renewing old friendships on the Latin American left, with intellectuals and ambitious colonels and majors.

About The Mogambo Guru:

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning , and other fine publications. For podcasts featuring the Mogambo, click here.